Deal-making isn’t what it used to be. Increasingly, the advisers
corporate management teams and boards turn to when they announce a
transaction are advising on how to deal with an activist showing up,
and there is little chance of that threat receding. “In today’s environment every transaction comes under increased scrutiny, not
just from activists but also from other shareholders,” says David
Hunker, Executive Director at JP Morgan and head of the firm’s
activism defense practice. “The days when deals were decided on a
handshake are gone.”

If
activists are often seen as mostly pro-deal, there are a significant
number of campaigns each year when the investors seek to hijack
previously announced situations. Activist Insight has tracked
“reactive” campaigns opposing either the rationale or the terms of
mergers or takeovers at 112 companies since the beginning of 2010,
with the overwhelming majority (97) facing criticism on the terms of
the deal, rather than the strategic basis.

“IF YOU ANNOUNCE A DEAL IN TODAY’S

ENVIRONMENT, YOU SHOULD HAVE A PLAN

READY IN CASE AN ACTIVIST EMERGES”

This
year alone, Elliott Management has waged high profile campaigns at
Samsung C&T—where it said fellow Samsung- group company Cheil
Industries was underpaying—and Family Dollar Stores—where a rival
bidder had been frozen out of the auction process. Two years ago, Carl
Icahn was railing against the leveraged buyout of Dell and Starboard
Value publicly criticized Smithfield Foods over its planned
acquisition by Shangui. All four examples highlight another key
feature of so-called “deal activism”— they each completed, with only
Dell adjusting its price to see off Icahn’s rival bid. As Sabastian
Niles, of Wachtell, Lipton, Rosen & Katz, the New York law-firm known
for its corporate defense and M& A practice, says, “Value-creating
deals continue to get identified, signed and done, regardless of
activist intervention.”

How to prepare

“If
you announce a deal in today’s environment, you should have a plan
ready in case an activist emerges,” says Steve Balet, of the
communications firm FTI Consulting. “You should also understand your
shareholder base will change.” The acquirer will usually see its stock
sink, while a target’s rises as arbitrageurs pile in. The first few
days after a deal goes public are a treadmill of activity. During the
“rollout,” a company and its advisers publish press releases, host
conference calls, brief analysts, shareholders and reporters on the
merits of the deal, and try to get the “story” widely heard before
alternative viewpoints creep in. Gary Lutin, a former investment
banker and now Chair of the Shareholder’s Forum, an advisory group,
says economics should be foremost. “Focus on the real benefits of what
you propose, and provide decision-makers with information they can
trust,” he advises. “For example, an independent, peer-reviewed
valuation is more likely to compel support from shareholders
than a proponent-commissioned fairness opinion.”

“Issuers need to articulate the basis for value and deal rationale
clearly, forcefully and consistently,” says Niles. “That also means
focusing on the economic and, where relevant, governance aspects of
the deal to win the support of the proxy voting advisers.”
Highlighting a robust process at board level—most comprehensively in
the proxy statement if the deal requires shareholder approval—is
critical, he suggests. And prudently structuring and protecting
the deal, including by accelerating deal approval, regulatory
and closing timelines, is also advisable.

When activists attack

“M&A
activism requires a similar response to other forms of activism,” says
Hunker. “It’s the same combination of theatre and politics on the
activist side, and companies have to be able to sell the benefits of
the deal.”

Broadly speaking, shareholders can raise three main issues with a
deal. First, a class action lawsuit, which inevitably follows the
announcement of any transaction. Second, an activist investor could
run a hostile process—a withhold campaign or even a proxy contest— to
force management to reconsider. Finally, appraisal funds pursuing a
re- evaluation of the deal price through the courts, which has
the potential to be an ongoing distraction. Icahn threatened to
use this latter option at Dell, but the standard was instead taken up
by a small number of funds patient enough to tie up their capital for
long periods (two years later, valuation arguments have just been
heard).

“ACTIVISTSLIKETO
RATTLETHECAGE.
ANYONE

WHOCAN’TDEALWITHTHATSHOULDN’TBE DOING

DEALSINTHEFIRSTPLACE”

While
a robust process can mitigate all three risks, the prospect of facing
down an activist requires a more vigorous response from both the
board and management team of the companies involved—especially
since both the buyer and the acquirer may be targeted (as Virginia-based
Media General recently found). Some companies have dealt
with activists by bringing them inside the tent; OM Group offered FrontFour Capital Management board seats shortly before selling
itself, while TICC Capital appears to have bought the support
of Raging Capital Management with a board seat and a couple of other
concessions.

Game-theory

Activists are mostly looking for a bump in the price, some corporate
advisers argue. Although target companies must be careful not to
breach their fiduciary duties by leaving value on the table, acquirers
can adopt precisely the opposite approach. “Leaving a few dimes in
reserve to placate the inevitable activist agitator has become just as
much a part of the standard playbook as reserving a few disclosure
statements to buy off the inevitable class action lawyers,” says
Lutin.

Both
he and Niles argue that activists have plenty to lose from a deal
falling through, since the target’s stock will typically sink. To
Balet, however, yesterday’s dumped M&A targets may be tomorrow’s
activist fodder, if one isn’t already present on the share register.
“Activists get a free look at value when a deal is fended off,” he
says. “If the company’s stock price sinks after the deal collapses,
the activist knows what the upside is.”

Not
all boards should be worried, however. Most advisers see deal-activism as a game of brinkmanship, in which the activist has as much
to lose as the company. “Activists like to rattle the cage,” Lutin
muses. “Anyone who can’t deal with that shouldn’t be doing deals in
the first place.”■

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